USFR Weekly Recap - December 24-25, 2011

JOHN’S OPEN: Hello and welcome to U.S. Farm Report, I'm John Phipps. Santa may have come a little early for some of us as grain markets have enjoyed a modest rally. This no doubt will cheer some spirits over the holiday weekend. But the big mood improver in my opinion is the annual cornucopia of nature's most perfect food: the cookie. I am amazed people have found so many ways to mix flour, butter and sugar together, but there are few versions I don't like. They are also efficient, requiring no silverware or dishes. So while I well know the true meaning behind Christmas, contemplating it with a few cookies in hand isn't a bad idea. Time for the news. Al took Thanksgiving, so today it's my turn to stand in for him.

MAIN STREET INDEX: A survey of bank CEO’s indicates the rural economy is as good as it's been since June of 2007, and it's gotten better each of the last three months. The latest rural main-street index from Creighton University shows hiring in rural America is up nearly 1.5% year over year, while it's up less than a point in urban areas. Economists say tepid loan demand and healthy checking deposits are driving a strong rural economy.

CORN YIELD: Despite challenging weather conditions on many farms, some corn producers were able to achieve record results this past year. In its annual yield contest, the National Corn Growers Association reports the average yield from the top three places was just over 313 bushels an acre, compared to USDA's national average of 146 bushels. In the six different production categories, yields ranged from 277 bushels to a whopping 429 bushels an acre.

DTR PRODUCTION NUMBERS: Despite forage shortages in the southwest, the Ag Department reports dairy producers out west have been able to grow their herd. California milk production is up 2.5% with an additional 27,000 cows. Texas had the largest year-over-year increase in milk production - up nearly 8.5%. New Mexico and Arizona also reported bigger herds. Overall milk production grew 1.8%.

RUSSIA WTO: There's a new member to the world trade organization. WTO ministers voted Friday to allow the Russian Federation to gain accession - the term for entry by joining the WTO, Russia agrees to follow the trade rules established by the trading partners. According to the WTO web-site, Russia has agreed to lower its tariffs on a wide range of products. The average tariff ceiling for Ag products going into Russian will be 10.8%. The current average is just over 13%. Tariffs on dairy products will see a five point decline.

CME STAYING: It looks as if the Chicago Mercantile Exchange is staying put - this after state legislators passed a bill lowering the company's tax burden. Lawmakers agreed to change the state's corporate tax laws. As a result, CME's taxes were lowered to 27.54% of all electronic trades. Previously they had to pay taxes on all trades, costing the group nearly 160 million dollars this year. In all, the new law cuts those taxes in half.

CROP WATCH: Crop watch is a two state swing beginning to the Pacific Northwest. A grower in Wilbur, Washington reports a record setting lack of moisture. He says there has been less than two inches of rain since July. Despite that, winter wheat stands are holding their own because of good subsoil. Just a week before Christmas a grower in Hancock County Ohio reports corn and soybeans have finally finished on his farm. While the corn had lots of mold and cracks, the yields were still averaging about 150- bushels an acre. When we come back I will sit down to talk markets with Mark and Jason Moss. The discussion starts in just two minutes. Please stay with us.

ROUNDTABLE: Time for the marketing round table. With me is Mark Gold and Jason Moss of Brock Associates. Mark, MF Global is the headline. How has it affected you? What are your customers telling and you what kind of reassurances are you trying to provide? First, I want to wish everybody a Merry Christmas. Very good. With MF Global, certainly it's impacting the market. We haven't had any issues. We have had a few clients wondering how safe everything is and we feel very safe. Other firms allow trading that --I personally wouldn't feel that comfortable having my account there. That's the key --.
No. It's one of the things to look at. You have to look at the firm stability, what they are doing, what they are doing with your money. What's their track record and that kind of thing. If you feel comfortable with the office that's fine. I wouldn't be keeping huge balances in one account itself you don't have to. I think the wire charges are going to go through the roof. People will wire money in and out. The fact of the matter is you have to look at the situation and say is what's happened there enough to stop you from trading and my answer is there is much more risk in not using the markets and subjecting yourself to what's happen in the real world than risking what may or may not happen with your firm.
What are you getting your clients?
It's taken a while.
It has. Clients sometimes need reminded just who do you clear through again, sometimes they forget.
I never kept track of that.
I think the point you made is really about is it a FDIC insured bank account. Every now and then take some of that and put it safer, don't just let it pile up.
You have to look at the whole situation here. This is the first time in 150 years in commodity trading this has happened where there may be potential customer losses involved.
It's a big loss.
No question.
Yeah. Considering though the size of the whole business.
Right. Right.
Minimizes that to some extent. For the farmer who had accounts at MF Global there is a serious problem. They will probably take several years to get back. That's the problem.
Unwinding it. Their money but the fact remains that we have dozens, if not close to a hundred to 125 other firms people can clear through. It's no different than we have seen grain elevators go out of business, ethanol plants and unfortunately MF Global. When a grain company goes out of business does it stop you from finding somewhere else to send your grain? People have losses but you don't stop farming. You can't stop marketing using the markets, you just have to be aware it's a new risk. We are in the last week of the year. Don't these markets sometimes get silly because of --lack of interest and low volume and it's hard to draw conclusions about what to look for the next week?
It is a low volume. That's something that's in the market with what's going on in South America with the current weather market and also with European Central Bank injecting close to a half trillion dollars back in to the system. We think kind of, probably a little bit of a liquid solution but it's caused the funds and you know a lot more money flow back in to the market. More willing to take some risks and that combined the weather has finally produced an overdue rally.
I think, for me, it's going to be hard to draw conclusion because things can happen. When we come back what they would like to talk about is first off the January report which could be anything and we will take a look at what happens out of the first of the year for funds as they decide to turn the page on the calendar.
Jason a big report coming out January the 12th, we’ve heard people with all kinds of spin on this, what are you looking to see or where do you think the surprises could lie in that upcoming report?
First the January, report day, which is the 12th of this year is probably the most significant day in USDA reporting of the year. It's a day of the final yields from 2011, the winter wheat seeding but probably the most important of the three is the quarterly stocks report where we finally get to see what the implied use during the first quarter was. On the yield side we do look for the corn yield and bean yield both to slightly decrease a little bit further but the stocks, it's interesting because of the way the acres, the way the -- stocks can change and the yield, the way it all flows down to the ending stock changes, is pretty important.
It's such a small number, 800 right now give or take a few and so little bit of change is significant. The grain stocks report they have had a lot of trouble locating counting the bushels.
They have, depending on who you want to listen to. I have thought the American farmer is holding a lot of grain. Though the elevators don't have the grain it's because the farmer hasn't been a willing seller. He has put it in the bins and gotten away with it the last 12, 18 months of holding on to the grain. Now I’m maybe backing off that. We have seen fairly good movement on the rally. I thought it would happen after the first of the year, seems like it's happening now. My friend mentioned that the last five reports, the last five January 12th reports we have been limit up or limit down which I think is pretty significant. If there is going to be a surprise I have a friend on the floor in Chicago. One of the great research guys in terms of trying to figure out production, and he believe it’s the government that is way off. He thinks the number’s lower, and the prices can move higher.
Good luck with that.

That’s the lessons from the last couple years don't necessarily apply themselves to this year. It's really important to ruse this rally to sell the bushels, get to the comfortable amount sold that you can look at the calendar more than the price and --take the pressure off that. Compare it now.
I think it's critical. You have a nice rally in December 12th corn. You have a net five dollars at the elevator for new crop corn. Which won't kill you. That is not a price to turn your nose up at. They have been holding corn over the last couple years nobody wants to sell ahead. In today's environment I think you have to ask yourself can you afford the risk? Considering corn limits now 40- cents on the first day and expanded the second day is 60- cents it can move a dollar off the January 12th report. Everybody will be happy if the report is bullish. If it's the other way and there is a surprise the other way can you with stand a dollar break in the market over two days and watch five dollar corn go to four corn? I think you have to be in position to have some protection, just to get through the report, protect the down play. If you have grain sold because there may be a bullish surprise we certainly look at buying back some of what we have sold.
Okay. It could be that the fireworks won't all be on New Year's and I think that's prudent to sit down and talk to the broker about a way to protect yourself we will become back in just a moment.

JOHN’S WORLD: Every week during the roundtables we show the standard disclaimer about how trading futures and options entail considerable risk. Our market traders also emphasize this when talking to live audiences too. There is risk in taking a position in the grain futures and options markets. If the market moves in the opposite direction than you anticipated, you can suffer a financial loss. But such losses are something we all pretty much understand and accept. Suddenly however, there is a bright light shining on what has been a relatively unexamined risk in the grain markets: the companies and people who do the trading. The collapse of MF Global has left outraged investors and farmers struggling to cope with this overlooked danger. Incompetent or corrupt business people are a risk in every business, but for farmers, as the prices have moved higher, the costs of those failures has grown as well. Regardless how the m-f global problem eventually works out - and at this point, it doesn't look pretty - many of us will be scrutinizing the firms and people we do business with more carefully. Depending on courts to recover our money after the fact is both slow and expensive. The government and the CME have clear responsibility to obey the law, and should be held responsible. But in the end if we have chosen the wrong people for partners, some of the responsibility is our own. Let us know what you think....send emails to mailbag@usfarmreport.com or call and leave us a voice mail.